July 26 2003

Beware of extra costs for mortgage paperwork

The Ontario Bar Association (OBA) has sounded a consumer alert to warn
homebuyers of new programs instituted by several of the major banks,
which can significantly increase the costs of borrowing for home
mortgages.

Deborah Rogers, incoming chair of the OBA Real Property Section,
raised a number of concerns in a phone call last week about several
pilot programs in which title insurers or third-party technology
providers assume the mortgage-processing functions on behalf of specific
lending organizations.

Under these programs, certain lenders outsource the administration
and processing of paperwork involved in providing mortgages to
homebuyers. Instead of doing the work in-house, the banks can achieve
significant savings by hiring third parties to do it.

Ultimately, Rogers said, the consumer winds up absorbing the cost of
the downloading.

Rogers, who practises real estate law with Weir Foulds LLP in
Toronto, said instead of dealing directly with the banks involved,
lawyers for homebuyers are required to work with these suppliers.

Last week I was acting on the purchase of a new condominium for a
first-time buyer who had arranged a mortgage with ING Bank of Canada. It
was only when he came into my office the day before closing to sign the
mortgage documents that he discovered he had to pay a third party, CLN
Highlander, a $214 fee for doing the ING paperwork. Within 24
hours, the client had matched the rate and terms of the ING mortgage
with another lender and saved the processing fee. We closed the
transaction smoothly with the alternate lender.

According to Rogers, the presence and role of intermediaries such as
CLN Highlander adds no value for either the client or the lawyer in the
transaction. Instead, she said, it presents lawyers with a number of
dilemmas.

Normally, a lawyer must act in the best interests of the client
either the borrower or the lender. But when a third party is involved,
the lawyer is faced with taking instructions from someone who is not a
client.

As well, the lawyer has no contact with the lender. This, according
to Rogers, results in potential conflict of interest and raises
questions about the lawyer's ability to act in the best interests of the
purchaser client.

TD Canada Trust has launched a similar project in the Ottawa area.
Instead of coming directly from the bank to the lawyer, all mortgage
documentation is prepared and forwarded to the lawyer by a third party,
First Canadian Title Insurance. The lawyer does all the customary
due diligence, registers the mortgage, and reports back.

The borrower is charged $159 for a title insurance policy for the
lender only. If the borrower wants title insurance for the purchase
component of the transaction, the cost is going to be $100 to $200 more
than if a combined purchaser and lender policy had been arranged with
other title insurers.

Last month, the real estate committee of the Carleton County Law
Association in Ottawa wrote a detailed letter of complaint to Kathy
Gregory, a senior mortgage officer at TD Canada Trust in Toronto. The
letter complained that borrowers are not told of the extra costs when
quoted a "package price" for TD mortgages, and that lawyers are forced
to use one title insurer - First Canadian - in contravention of
Law Society regulations.

"We believe that TD Canada Trust has a legal, moral and ethical
obligation to provide up-front disclosure to its customers," the letter
said. Clients end up "feeling that TD Canada Trust has put something
over on them" and that it "is outsourcing its mortgage administration
costs on their backs."

The Carleton County Law Association letter also complained about the
lack of a lender support person on mortgage files, poor training level
of staff handling the transactions, and increased potential for failed
closings.

In light of the backlash from lawyers and clients, Rogers reported
that TD officials have indicated they will be re-evaluating the
initiative.

In the meantime, Rogers provided this advice to consumers who are
arranging mortgage loans:

Be very careful about hidden costs in
mortgage approvals.

Get detailed particulars about "package
price" mortgage loans.

Ensure there will be freedom to choose any
title insurer.

Make sure all "processing" or "mortgage
preparation" fees are disclosed in writing, up front.

Bob Aaron is a Toronto real estate lawyer. He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.Visit the Toronto Star column archives at http://www.aaron.ca/columns for articles on this and other topics or his main webpage at www.aaron.ca.